Financial development, sustainable FDI, and carbon intensity of growth in Sub-Saharan Africa

Abstract

This study uses an unbalanced macro panel framework, drawing on data from 48 Sub-Saharan African (SSA) nations from 2005 to 2023, to evaluate the relationship among financial development, sustainable FDI, and the carbon intensity of growth in the region. Due to strong cross-sectional dependence, which indicates vulnerability to global financial cycles, energy price changes, and climatic concerns, the research uses correlation diagnostics and Driscoll-Kraay standard error regressions to provide consistent inference, with financial development measured through interest rate spread, bank lending rates, and private sector domestic credit. The findings show that financial deepening has varied environmental effects. Domestic credit extension has the most positive impact on carbon intensity, demonstrating that SSA’s credit-fuelled growth remains carbon intensive, while lending rates have little explanatory power and interest rate spreads are negatively correlated with carbon intensity, implying contractionary scale effects rather than green technology advances. Sustainable foreign direct investment mitigates credit related emissions when combined with financial growth, but is insufficient on its own, whereas renewable energy consistently reduces carbon intensity, underscoring its role in decoupling growth from emissions. The results suggest that financial development without climate-aligned regulation risks entrenching carbon lock-in across the region, and that financial deepening and FDI policy must align with the Paris Agreement and the Sustainable Development Goals to achieve growth-compatible decarbonisation, contributing to the sustainable finance literature on developing regions.